WELFARE REFORM IN UNITED STATES of AMERICA

WELFARE REFORM IN UNITED STATES of AMERICA

We Are Different 1, The argument regarded in welfare system is Equity vs. Efficiency. 2, Market failure argument exists before and after government intervention.

Our Framework 1, The justice of government welfare system 2, The introduction of American welfare system 3, Problems involving in this system 4, Issues associated with this system 5, Our suggestions

Why should the government intervene? To Promote Equity The government has the responsibility to ensure that all its citizens live above the poverty line and that everyone has access to similar programs. It does this by transferring money from the rich to the poor.

But the question is why is it the responsibility of the government and not the market? There are several arguments to answer this question:

The Positive Externality Argument If I as an individual help the poor, the poor become better off, but society as a whole becomes more productive and the standard of living is raised. Trying to create a program that generates a positive externality through private markets never works because everyone will want someone else to pay for the benefits consumed by all. Therefore, the government must intervene.

The Risk Sharing Argument Public assistance programs provide individuals with insurance against economic risks. It is these types of risks that the private market will not insure against because of the Adverse Selection problem.

The human dignity argument Public assistance programs to the poor fulfil a primary role in society, which is to respect human life and avoid wasted human life.

The capacity to respond argument The moral responsibility of a society is much greater when there is economic and technological capacity to assist the poor. In the U.S., helping the poor is not without cost, but it certainly won t create financial ruin.

The administrative capacity argument The government may have a better administrative and programmatic capacity to carry out redistribution than the private sector. The government can collect information about need and implement programs more easily than the private sector. In this regard, the government has a comparative advantage.

The market failure argument Given the U.S. is a market oriented economy, it has a responsibility to those who can not survive in the market on their own. There are market failures that arise when a person wants to sell his/her labor for wages and can t find anyone to buy them.

Economic Rights Argument Individuals have economic rights just as they do citizenship rights. These include: access to education, food, medical care and housing. Government should intervene if these basic needs are not being met.

U. S. Welfare Program CASH ASSISTANCE PROGRAMS Aid to Families with Dependent Children (AFDC) Supplemental Security Income (SSI) IN-KIND ASSISTANCE PROGRAMS Housing and Food Assistance Medicaid Job Training and Placement Head Start Preschool Enrichment The Earned Income Tax Credit (EITC)

Eligibility Standards CATEGORICAL AID PROGRAMS MEANS TESTED PROGRAM PARTICULAR GROUPS OF PEOPLE INCOME

Major Public Assistance Programs in the United States(1993) Participan ts Participants Total Cost Cost/ %cost paid % Child % % Year (thousand) (mil $) Participants($) by Fed Govt or Youth Adult elderly AFDC 1993 14,144 25,242 1,785 48.6 66.2 33.8 - SSI 1993 6,011 25,640 4,266 97.7 11.7 52.6 35.7 Food Stamps 1993 28,424 26,304 925 94.3 52.0 41.0 7.0 Medicaid 1992 30,926 118,166 3,821 56.9 52.0 37.8 10.3 Housing (all programs) 1993 5,625 20,487 3,642 100.0 45.0 na 35.0 JIPA, title HA 1992 955 1,741 1,823 100.0 45.0 49.0 - EITC 1992 14,097 13,028 924 100.0 na na na Head Start 1993 714 2,776 3,888 100.0 100.0 - -

Cash Assistance Programs AFDC (Aid to Families with Dependent Children) Available to Single Mothers with Children Shared Between the Federal Govn t and State SSI (Supplemental Security Income) Enacted in 1972 Available to Low-Income Elderly and Disable Individuals A Federally Designed Program

In-kind Assistance Programs Food Stamps Available to All Poor People Cost Paid by the Federal Government Medicaid Run by the State, Cost Shared with the Federal Govn t Provides Assistance to Elderly or Disabled Persons A Federally Designed Program The Earned Income Tax Credit (EITC) Began in 1975 Subsidies to Low-Wage Workers Through the Tax System

3. PROBLEMS INVOLVING IN THIS SYSTEM Our analysis is divided into 3 points : 3-1. IN-KIND ALLOCATION versus CASH BENEFITS 3-2. CATEGORICAL versus BROAD- BASED AID 3-3. MARKET FAILURES

3-1. IN-KIND ALLOCATIONS vs. CASH BENEFITS (i)- Specificity of the In-kind system : *Restriction in the consumption behavior (Budget constraint ) IN-KIND ALLOCATIONS CANNOT BE USED TO BUY OTHER GOODS

CONSUMPTION OF OTHER GOODS Budget constraint before in-kind allocation Budget constraint after in-kind allocation of $100 100 100 IN-KIND ALLOCA- TIONS

(ii)- Inefficiency of in-kind allocations : * Example : FOOD- STAMPS E E E Budget Constraint After Food Stamps ($100) Budget Constraint Before Food Stamps Budget Constraint After Subsidy ($75)

A CASH SUBSIDY OF $75 (E ) CAN GIVE THE SAME LEVEL OF UTILITY AS $100 OF FOOD STAMPS (E) A CASH SUBSIDY OF $100 (E ) MAKE PEOPLE BETTER OF THAN $100 FOOD STAMPS (Substitution effect)

(iii)- COMPARISON OF IN- KIND vs.cash In-Kind allocations -HIGH ADMINISTRATIVE COST (each type of allocation must have its specific organization) -DISTORTION IN CONSUMPTION BEHAVIOR (Specificity of in-kind allocationífig. A ) Cash Benefits -LOW ADMINISTRATIVE COST (Only one organization can implement the whole program) -RATIONAL CONSUMPTION (Consumers can use both substitution and income effectsífig. B )

CONCLUSION: CASH BENEFITS IS MORE EFFICIENT THAN IN-KIND ALLOCATIONS

3-2.Inefficiency of US Welfare System Categorical vs. Broad-Based Aid

1) Difference b/w Categorical and Broad- Based Aid 2)Categorical Welfare System Higher Administration Cost Negative Behavior 3)Broad-Based Aid Simple Administration Tax rate on middle-income individuals

ISSUES ABOUT WELFARE SYSTEM 1, Dishonest behavior vs. Equity 2, Decentralization vs. Federalization 3, Enforce single parent (unmarried teenager) to work vs. Who takes care the children in this kind of families?

4, Education and training with high administrative cost vs. low cost program with less education and training 5, The effects of tax incentive

Recommendation 1) Scrap plan 2) Not viable since political, social and ethical issues at stake as well as an understanding of the dynamics of poverty

Dynamic of Poverty

Poverty Trends In The US 1984-1994 POVERTY TRENDS 1984-1994 8000 7000 6000 5000 4000 3000 Series1 2000 1000 0 1984 1989 1994

Poverty Variables DYNAMICS OF POVERTY 22% 57% 21% POVESC POVENT POVSTAY

3) Issue of wealth ownership Individuals need to become wealth owners show correlation between wealth owners and poverty. INCOME QUINTILE NO OF MONTHS CONSUMPTIO N CAN BE SUSTAINED Top Quintile 19 61.3 Fourth Quintile 3.5 7.9 Middle Quintile 1.2 1.8 Second Quintile 1.1 0.6 Bottom Quintile 0.0 0.0 (Wolff 1998) NO OF MONTHS SONSUMPTION CAN BE SUSTAINED AT 125% OF POVERTY STANDARD

4)Insuring macroeconomic growth There has been a strong correlation between economic growth and poverty alleviation. 5)Lessons from Non- Government Organization.